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SUBMISSION BY QUEENSLAND GOVERNMENT TO REVIEW OF LOCAL GOVERNMENT

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SUBMISSION BY QUEENSLAND GOVERNMENT TO REVIEW OF LOCAL GOVERNMENT Powered By Docstoc
					        SUBMISSION

            BY


 QUEENSLAND GOVERNMENT


            TO

        REVIEW OF



LOCAL GOVERNMENT (FINANCIAL
    ASSISTANCE) ACT 1995



         JULY 2000
                                           1

INTRODUCTION

This Submission on the Review of the Local Government (Financial Assistance) Act
1995 is made by the Queensland Government in response to the Commonwealth
                    s                                                s
Grants Commission’ request for initial submissions in the Commission’ Discussion
Paper of June 2000.

                                     s
This Submission sets out Queensland’ policy position on the matters raised in the
Discussion Paper. Further detailed Submissions will be made, if needed, following
                                                           s
meetings with the Commission and release of the Commission’ draft report.

Detailed information on the Queensland Local Government Grants Commission’s
methodology and operations has been supplied in discussions with the
Commonwealth Commission.

While the Commission may only address the matters raised in the Terms of Reference
for the review, Queensland reiterates its view, already conveyed to the
Commonwealth Minister, that the exclusion of consideration of the interstate
distribution of the grant is a major flaw in the review.

The current per capita distribution of the fiscal equalisation component of the grant is
a major inhibiting factor to the achievement of equalisation among local governments.
The capacity of local governments in Queensland to provide improved levels of
                                             s
service is impaired by the Commonwealth’ failure to address this issue.
                                             2

QUEENSLAND’S GENERAL RESPONSES                             TO     THE      TERMS        OF
REFERENCE FOR THE REVIEW

The local government financial assistance grants are, and should remain, general
purpose grants to local government.

Horizontal fiscal equalisation is the appropriate basis on which to distribute the
general grant provided under Section 9 of the Act. A basis related to road expenditure
needs, such as the current formula using road length and population, is appropriate for
the distribution of the identified road component provided under Section 12 of the
Act.

It is inappropriate for the Act to include provisions about objectives and purposes
such as those currently contained in Section 3 of the Act relating to improvements in
the efficiency and effectiveness of councils and services to Aboriginal and Torres
Strait Islander communities.

While these are important and worthwhile goals and may well be facilitated by the
provision of the grant, they are misplaced in an Act dealing with general purpose
financial assistance.

The legislation should and needs only to deal with matters necessary for the provision
of financial assistance to local government in the form of general purpose grants.

Queensland has some concerns over the goal in Section 3 of the Act to promote
consistency in the methods by which grants are allocated. The concern is that this
provision could be used to prescribe a highly precise standard methodology across all
States.

The National Principles, made under the Act, currently provide a broad standard
framework within which the Grants Commission in each State has the flexibility to
determine its own methodology.

Consistency in methods does not necessarily achieve consistency in outcomes (either
in the pattern of distribution between local governing bodies or in the achievement of
equitable levels of services) across the States.

The reasons for this are as follows. Firstly, the fact that the national pool is distributed
between the States on a per capita basis, rather than a fiscal equalisation basis, distorts
the pattern of distribution.

Secondly, there are significant differences in the demographic patterns of each State.
Queensland, for example, is demographically different to other States in that it is more
decentralised and a greater proportion of the population live in urban and rural areas
outside the major metropolitan area.

In addition there is considerable diversity in the size and structure of local government
systems; differences in the valuation bases used for rating; functional variations and
variations in revenues and expenditures across Australia. This diversity clearly
illustrates the difficulties in making comparisons between the States and the
                                            3

complexities of establishing grant allocation methodologies, which recognise these
differences.

It is for these reasons there must be flexibility for individual Grants Commissions to
determine methods which best suit the circumstances existing in their State.

Queensland generally considers the current National Principles to be appropriate.

Queensland considers the objective of horizontal fiscal equalisation to be still relevant
                                                                               s
and equalisation should remain the primary objective of the Commonwealth’ funding
arrangements for local government.

Limited departure from this primary objective is appropriate in areas such as;
providing certainty of funding, the minimum grant entitlement and the separately
identified road funding.

Queensland strongly supports the retention of the per capita minimum allocation of the
general grant at least at its current level of 30%.

The National Principles are, however, silent in respect of the objective in the Act of
certainty of funding. Queensland supports the inclusion of a National Principle, which
reinforces the objective of certainty of funding and the ability of Grants Commissions to
apply maximum decrease and/or increase conditions to constrain undesirable variations
in the annual grant allocations. Currently, unless the Commonwealth Minister agrees to
a “transitional modification of national principles” under Section 26 of the Act, there is
no provision that specifically supports the current practice of some Commissions to
apply such conditions.

The long-term use of the transitional modification powers under Section 26 is not
desirable as the implication of this Section is that any arrangements employed are only
temporary or transitional. Maximum decrease and increase conditions considered by
Grants Commissions may be intended to be permanent (or, for example, until the next
major review of the methodology is carried out).

Annual variations in grant allocations are caused not only by the phased introduction of
methodology changes, but also by changes in data, data deficiencies, reassessment of
disability allowances and changes in underlying socio-economic conditions. Whilst
these changes should not be ignored and should ultimately affect the grant allocations,
large fluctuations in these factors should not necessarily be allowed to also result in
significant undesirable annual variations in grant allocations.

The relatively small size of the grant compared to total local government revenue and
expenditure coupled with limitations of data and statistical models can also lead to
trends in outcomes which are clearly and demonstrably volatile and/or extreme, either
intuitively or when compared to other data. It is not unreasonable for Grants
Commissions to limit such trends provided the limitation does not offend the principle
of equalisation or other known data.

The eligibility for assistance of bodies declared by the Commonwealth Minister to be
local government bodies under Section 4 of the Act is not an issue of particular
                                           4

significance in Queensland. In Queensland (with the exception of the mining
company town of Weipa) there is no situation of any community being represented by
a body, which is not a local governing body for the purposes of the Act. All of the
area of Queensland (with the exception of Weipa and one small island in the Gulf of
Carpentaria) is incorporated into the area of a local government constituted under the
Local Government Act 1993 or the area of an Aboriginal or Torres Strait Islander
Council. If the situation in Weipa changed in the future and it gained status as a local
government, it would automatically be eligible to receive a grant as a local governing
body.
                                          5


           S
QUEENSLAND’ RESPONSES TO THE QUESTIONS ON WHICH THE
COMMISSION HAS SPECIFICALLY SOUGHT VIEWS.


           (i) Are the objectives of the Commonwealth in providing
               assistance to local government fulfilled through the
               operations of the Local Government Grants Commission in
               your State? Are there other objectives that should be
               considered?


          (ii) Are the National Principles (the guidelines for the
               distribution of Commonwealth financial assistance to local
               government) fulfilled through the operations of the Local
               Government Grants Commission in your State? Are there
               other principles that should be considered?


                                 s
As outlined in the Queensland’ general response, the grant is a general purpose grant
in the hands of local government and it is inappropriate for the Act to contain any
objectives not directly related to the allocation of the grant.

Queensland strongly opposes the inclusion of objectives not directly related to
allocation of the grant to avoid any possible conflict in interpretation of the
supremacy of the various objectives in the Act.

The objectives of improving the financial capacity of Councils; improving the
capacity of Councils to provide their residents with an equitable level of services and
improving the certainty of funding for Councils are fulfilled through the operations of
the Queensland Local Government Grants Commission.

Queensland makes no comment on the achievement of the other objectives as these
objectives, while perhaps facilitated by the grant, are not directly relevant to the
allocation of the grant.

The National Principles are met through the methodology used by the Queensland
Local Government Grants Commission.

As previously indicated Queensland supports the inclusion of a National Principle
which reinforces the objective of certainty of funding and specifically supports the
ability of Grants Commissions to use maximum decrease and/or increase conditions.

Queensland does not support the detailed prescription of methodology within the Act
or National Principles. For the reasons indicated previously (demographic, structural
and functional differences) there must be flexibility for individual Grants Commissions
to determine methods, which best suit the circumstances existing in their State.

The fact that there is no one ideal model of fiscal equalisation is highlighted by
research conducted by the Queensland Local Government Grants Commission. The
                                           6

Commission has recently been reviewing the expenditure and revenue standards used
in the calculation of the grant.

                                                         s
The Commission engaged the Queensland Treasury’ Office of Economic and
Statistical Research to derive a range of standards to trial. Every option within the
range of standards derived is statistically reliable and theoretically appropriate, yet
they produce a range of outcomes which vary markedly. For example, the difference
in the outcomes for some small remote rural shires vary by up to $1M across the
range of models.

This further highlights the need to provide Commissions with sufficient scope to
exercise judgement in the choice of statistical models.

         (iii) Is equalisation still a relevant objective of the
               Commonwealth in relation to financial assistance for local
               government, and why?

Queensland considers the objective of horizontal fiscal equalisation to be still relevant
                                                                               s
and equalisation should remain the primary objective of the Commonwealth’ funding
arrangements for local government.

Limited departure from this primary objective is appropriate in areas, such as
providing certainty of funding, the minimum grant entitlement and the separately
identified road funding.

          (iv) What is the purpose of the minimum grant? Is the concept
               of a minimum grant still relevant to the distribution of funds,
               and why? What would happen if it were changed?

The per capita minimum should remain at least at its current level of 30%.

There are two reasons for retaining the per capita minimum. Although it is not
specifically referred to in the legislation, the funding arrangements recognise and
partially addresses the vertical fiscal imbalance between the Commonwealth and local
government. The per capita minimum ensures that all Councils receive some share of
Commonwealth revenues.

The second reason for retaining the per capita minimum is a safeguard against the
imprecision of the models and data used in the grant models.

A number of Queensland Councils which currently receive the per capita minimum
would receive no grant if the per capita minimum was removed. This would be
unacceptable.

The inequity of the current per capita interstate distribution of the general grant would
place these councils at a still greater disadvantage than their interstate counterparts.
                                           7


          (v) Are the current arrangements surrounding the allocation of
              Commonwealth assistance sufficiently transparent? Are the
              National Principles sufficiently understood?

Queensland believes its methodology is sufficiently transparent. It is acknowledged
there are varying degrees of understanding amongst councils. In the development of a
grant methodology there is, however, sometimes a trade-off between precision on one
hand and simplicity and transparency on the other.

The Queensland Local Government Grants Commission has taken steps to simplify its
methodology and spends time during visits to local governments to explain the
methodology. The Grants Commission endeavours to visit each council once every 3
to 4 years.

          (vi) Do you understand how grants are calculated by your State
               Grants Commission?      What do you consider are the
               shortcomings/strengths of your State Grants Commission’ s
               allocation method? What additional information should
               your State Grants Commission provide?

The first and last questions would seem directed more at the recipients of the grant.

All Commissions’ methodologies will have strengths and shortcomings to varying
degrees. The main source of shortcomings is likely to be in the lack of available
comprehensive data to make unequivocal objective assessments.

The strength of the current arrangements lies in having independent Commissions
with the necessary knowledge and experience to make informed judgements to
compensate for the lack of data and make recommendations suited to the
circumstances of their State or Territory.

         (vii) How important is stability in the size of grant funding for
               councils as an attribute of the grant distribution system?

It would appear from feedback received from local government, stability in
grant allocations or certainty of funding, particularly in the form of constraints
on annual variations, is of significant importance to Councils.

                                                               s
        (viii) To what extent do the methods of your State’ Local
               Government Grants Commission take account of the special
               circumstances of indigenous communities?

In Queensland, most larger geographically discrete indigenous communities are
located within one of the 32 Aboriginal and Torres Strait Islander Councils or the
Shire Councils of Aurukun and Mornington. The methodology in Queensland
attempts to treat these Councils on the same basis as other local governments, whilst
still taking into account the special circumstances of these communities.

                        s
The Grants Commission’ efforts in this regard are hampered by the lack of
demographic and other data that is available for these Councils compared to other
                                         8

local governments. For example, annual Estimated Resident Population data is not
available for most of these Councils as the Australian Bureau of Statistics does not
recognise them as “Legal Local Government Areas” (LGAs) or separately identify
them as “Statistical Local Areas” (SLAs) under the Australian Standard Geographic
Classification system (ASGC). The only exceptions to this are the Shire Councils of
Aurukun and Mornington and the Palm Island Aboriginal Council.

This general lack of data makes it difficult for the Grants Commission to apply the
methodology to these Councils. The Grants Commission as much as possible takes
into account the special circumstances of these communities. For example, in the
assessment of rate raising capacity the Commission recognises that indigenous
communities effectively have no rate raising capacity because land within the
communities is non-rateable.

The Grants Commission treats two-thirds of the general purpose operating grant these
Councils receive from the State Government by inclusion, as it considers National
Principle A4 “Other Grant Support” requires an inclusion approach.

         (ix) Should consideration be given to combining the general
              purpose and roads funding pools?

The two pools should remain separate.

                            s
It is the State Government’ understanding that there is almost universal support
amongst local governments in Queensland for the continuation of the separate
calculation of the road component.

A separation also allows a different method of distribution to be used if considered
desirable.

In Queensland, the identified road component is largely (70%) treated by the
inclusion approach in determining the general grant.

          (x) What has been the impact of the Commonwealth assistance
              on the level of State assistance to local government?

State assistance to local government in Queensland has not declined because of the
Commonwealth assistance. The level of State assistance under the major grant
programs provided to local government has increased since the previous Review of
the legislation in 1994.

Local Governing Bodies Capital Works Subsidy Scheme
(Including Road & Drainage Grants)

Year               Actual payments **
1994/95            $57,973,000
1995/96            $60,976,175
1996/97            $86,928,143
1997/98            $98,336,235
1998/99            $103,229,022
1999/2000          $108,283,268
                                           9


** These figures exclude payments made under the Natural Disaster Relief
Arrangements. Under this joint Commonwealth/State funded program the State
generally provides the majority of funding. For example, in 1998/99 payments to
Councils totalled $50,231,000 of which 61% was funded by the State.

Transport Infrastructure Development Scheme

Year                Actual payments
1994/95             $21,000,000
1995/96             $35,000,000
1996/97             $41,000,000
1997/98             $48,000,000
1998/99             $59,000,000

In addition to these major programs, there are a range of other smaller grant programs.

          (xi) What has been the impact of the Commonwealth assistance
               on the efforts made by local government to raise revenue
               from its own sources?

Whilst a detailed analysis has not been undertaken there is no evidence that
rates substitution has occurred or is occurring in Queensland, at least since the
last review of the Act in 1994.

Taxes on property (general rates) by the total local government sector in
Queensland (Australian Bureau of Statistics Catalogue 5506.0 Taxation
Revenue) have increased by 37% from $771M in 1992/93 to $1,058M in
1997/98. These figures exclude user charges for services such as garbage
disposal, water and sewerage. In the same period the total Financial Assistance
Grant to local government in Queensland increased by 16% from $191M to
$222M.

Queensland would strongly argue the current distribution arrangements do not
encourage a reduction in rating effort, but rather encourage revenue raising at least at
an average level.

          (xii) What Commonwealth and State assistance for specific
                purposes is provided for local governments?          Is the
                assistance based on an assessment of individual submissions
                or a broad assessment of the needs of local governments in a
                field?

In Queensland specific purpose assistance by the State is provided through a range of
grant and subsidy programs. Generally this is in the form of subsidies or grants for
capital infrastructure, particularly in the roads, water and sewerage functions. A
detailed list of the programs will be supplied separately. Most assistance is typically
based on an assessment of individual submissions against the criteria of the particular
funding program.
                                          10

        (xiii) What limitations are imposed on local government revenue
               bases, eg rate-capping and other (limiting) State legislation?

There are no limitations imposed by the State Government on local government (eg
rate capping).

        (xiv) What major changes have there been since the Act was
              passed in 1995 in the distribution of service provision
              responsibilities or revenue capacities between the
              Commonwealth, State and local spheres of government? Are
              any other changes under active consideration?

There has been no significant devolution of responsibilities from other spheres of
government to local government during the period, though there has been some
renegotiation of State and local government roles and responsibilities across a range
of functional areas.

A number of protocols have been developed between the State government and the
Local Government Association of Queensland on roles and responsibilities. This has
sometimes occurred as a part of introducing new legislation (eg the Integrated
Planning Act 1997 has put in place a new planning system which provides greater
transparency and clarity of the planning processes and which has necessitated the
renegotiation of State and local government roles and responsibilities in relation to
planning).

Another example is the Environmental Protection Act 1994, through which higher
standards have evolved in the areas of solid and liquid waste (including sewerage)
disposal. Also licensing of some environmentally relevant activities has been
devolved to local government.

At the same time, however, increased funding from the Queensland Government in
the form of grant assistance has followed. For example, in 1996 capital subsidies
provided under the Local Governing Bodies Capital Works Subsidy Scheme for
sewerage treatment were doubled from 20% to 40% and a 50% subsidy introduced
for sewage effluent re-use. The Landfill Remediation Assessment Program and the
Advanced Wastewater Treatment Technology Program have also been introduced in
recent years to assist local government meet higher environmental standards.

Regulations under the Environmental Protection Act 1994 give local government the
power to collect license and approval fees when licensing environmentally relevant
activities.

There have been no major changes in the distribution of revenue capacities, although
local government is making increased use of user charges.

Local governments in Queensland have traditionally had a wide general competence
power. The Local Government Act 1993, which has continued this tradition, further
widened the jurisdiction of local governments by not limiting their responsibilities to
a list of specific powers. It confers on local governments autonomous responsibility
for the good rule and government of their areas.
                                           11

The methodology employed by the Queensland Local Government Grants
Commission recognises changes to functional responsibilities. The methodology
attempts to pick up as many categories of expenditure and revenue as possible.


               (xv) To what extent do the administrative arrangements imposed
                    by the Act need re-examination or amendment?

The system by which the grant is indexed annually needs amendment because of the
confusion created by the application of the adjustment factor each year. Whilst the
grant should continue to be indexed each year in real per capita terms (CPI and
population growth) the use of an estimated entitlement and a final entitlement needs
to be reviewed to avoid the need to apply the adjustment factor in the following year.
This would avoid confusion among Councils between the estimated entitlement for a
year and the actual cash grant for that year.

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